Sunday, June 28, 2015

Greece Update

Drachmas were probably printed months ago and are sitting in a warehouse somewhere. The intention is not to use them.

IOUs (a type of bearer bond) have probably been printed already as well. They would be used long before a drachma is introduced.

Reintroduction of a drachma would trigger Grexit under ECB rules. That's why they will not be rolled out hastily (or at all, most likely).

Although banks will be closed all week, this doesn't necessarily mean ATMs will be empty all week. Greece can put more Euros in circulation if it needs to. But it will limit withdrawals, to stem outflow.

Banks are closed because they no longer meet capitalization (collateral) requirements. They have required, and until now have received, almost a billion Euros a day of ELA (Emergency Liquidity Assistance) from ECB. Unfortunately, ECB has decided to cap ELA at last Friday's maximum. This forced the bank holiday.

Bank holiday does not mean Greece will default on its Tuesday obligation to IMF. Ironically, as I said in an earlier post, Greece may very well be able to make the Tuesday payment in full.

The bigger question is whether Greece can make the IMF payment and still meet its pension-payment (and other) requirements. If paying IMF leaves the government short, it may have to pay pensioners with bearer bonds (IOUs).

An ECB payment of €3.5 billion is due July 20. This payment is obviously in jeopardy now.

ECB will restore ELA when talks resume.

In Cyprus, the bank holiday lasted 12 days but the supply chain for basic commodities began to dry up sooner than that. Obviously, it will not do Syriza or Tsipras any good to have food shortages ahead of the referendum. We will see now whether Tsipras has miscalculated on this basic issue.